The chancellor's attempts to 're-set' Britain's banking system, including a pledge to "electrify the ring-fence if banks fail to split up the high street retail branch operations from the dealing floor, left the Commission "wholly unconvinced".

The Commission wants more powers for the Bank of England to control how much banks can borrow, as well as for regulators to have the power to force a complete split of retail and investment banking operations.

This would be exercisable only after independent review and with Treasury approval, but according to the Commission has been rejected over fears of giving too much power to financial regulators.

Commission chairman Andrew Tyrie MP said: "The Bill is certainly much improved. However, the government rejected a number of important recommendations. The Commission has examined these again, alongside the government's explanations for rejecting them.

"We have concluded that the government's arguments are insubstantial. There remains much more work to be done to improve the Bill."

He added that the government had also failed to address the panel's recommendation for a periodic, independent review of whether the ring-fence is doing its job. Bank of England governor Sir Mervyn King is among those in favour of this.

The Bill is due to be go through its second reading in Parliament on Monday.

Labour said the latest report from the Commission made "for disappointing reading". Shadow chancellor Ed Balls added: "It confirms George Osborne is continuing to duck the radical banking reform we need and which the cross-party commission has demanded."

The Commission also expressed concern about the capital ratio applied to banks - Current international standards propose that banks have a leverage ratio of 3%, meaning £1 of capital can support £33 of loans, but the Commission believes this percentage is too low.

Increasing the ratio would force banks to either raise more capital or reduce the size of their balance sheets if they were found to be in breach of the cap.

The Bill is based on the recommendations of the Independent Commission on Banking, which came up with ways to make the sector safer and give greater protection to depositors in the wake of the financial crisis.

The British Bankers' Association responded to the report on Monday by saying: "The banking industry supports the principle of ringfencing and is committed to working with the government and the regulators to ensure that the integrity of the ringfence is maintained.

“The Commission rightly identifies that a number of the other Independent Commission on Banking recommendations will be delivered through legislation under discussion in Europe. We would urge the government to work with our European partners to ensure that these changes are adopted soon."

The report arrives on the heels of a survey in the Telegraph of international bankers, which found the majority felt they had been underpaid in the past year.